On June 12, the Pennsylvania Department of Labor and Industry submitted proposed rulemaking announcing proposed revisions to the Pennsylvania Minimum Wage Act overtime exemptions. The proposed rulemaking seeks to significantly increase the salary level needed to qualify as exempt under the act’s white collar exemptions, and purports to update the duties tests to conform to federal law.

The proposed revisions increase the minimum salary needed to qualify for the Pennsylvania Minimum Wage Act’s (PMWA’s) administrative, executive, and professional exemptions (the “white collar exemptions”) to annually increasing levels that far exceed the current salary thresholds under the PMWA.

The proposed revisions would increase the PMWA salary threshold to $31,720 annually ($610 per week) upon publication of the final rule, which is expected in 2019. The Pennsylvania Department of Labor and Industry (DLI) also proposes to increase the minimum salary level to $39,832 annually ($766 per week) one year after publication of the final rule, and to $47,892 annually ($921 per week) two years after publication. DLI then proposes to automatically reset the threshold three years after the final rule’s publication, and on January 1 every three years thereafter, to an amount equal to the 30th percentile of earnings for full-time, non-hourly employees for the Northeast Census region, as published by the US Department of Labor (DOL) (this threshold equaled $47,892 annually ($921 per week) in 2016). DLI’s proposed rule would permit up to 10% of the minimum salary levels to be satisfied by nondiscretionary bonuses, incentives, and commissions paid quarterly or more frequently.

Lastly, DLI’s proposed rulemaking updates the duties tests for the white collar exemptions and indicates that it intends to make them more consistent with the 2004 federal regulations interpreting the Fair Labor Standards Act (FLSA) white collar exemptions.

DLI is expected to publish the proposed rulemaking in the Pennsylvania Bulletin on June 23, 2018, after which the public will have 30 days to submit comments. DLI estimates that the changes could impact approximately 367,000 salaried employees in Pennsylvania by 2021, and approximately 460,000 by 2022.

Background

The FLSA and PMWA contain white collar exemptions that exclude certain executive, administrative, and professional employees from federal and Pennsylvania minimum wage and overtime requirements. Prior to 2004, the FLSA regulations contained two tests to determine whether an employee satisfied each white collar exemption – a “long” test with a more stringent duties test coupled with a lower salary threshold, and a “short” test with a less stringent duties test coupled with a higher salary threshold. The PMWA regulations were enacted in 1977, and they mirrored the FLSA regulations then in effect.

In 2004, DOL enacted regulations streamlining the white collar exemption tests under the FLSA. The 2004 regulations set forth one streamlined salary threshold of $23,660 ($455 per week), and one duties test for each white collar exemption. To qualify for one of these FLSA exemptions, employees generally must: (1) be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) be paid more than a specified salary threshold, currently $455 per week ($23,660 annually); and (3) primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations.

DOL issued revised white collar exemption regulations in 2016 that purported to increase the FLSA salary threshold for the white collar exemptions significantly (read our May 2016 LawFlash on the topic). Following litigation and an injunction precluding enforcement of the new FLSA salary threshold, implementation of the 2016 DOL regulations has been stayed pending reconsideration by DOL.

The PMWA regulations have not been updated since 1977 and, therefore, they still contain the old “short” and “long” tests derived from the pre-2004 FLSA regulations, along with the 40-year old salary thresholds ($155 per week under the long test and $250 per week under the short test).

The Proposed Rule

DLI’s proposed rulemaking sets forth several proposed changes to the current PMWA white collar regulations:

  • Eliminates the short and long tests for the PMWA white collar exemptions that DOL eliminated from the FLSA white collar exemptions in 2004, and revises the PMWA regulations to include one streamlined salary threshold for all of the PMWA white collar exemptions.
  • Gradually updates the 40-year old salary thresholds for the PMWA white collar exemptions over the next three years. The proposed regulations set the new, streamlined minimum salary level for the PMWA white collar exemptions at $31,720 annually ($610 per week) upon publication of the final rule (expected in 2019), $39,832 annually ($766 per week) one year after publication of the final rule, and $47,892 annually ($921 per week) two years after publication of the final rule.
  • Establishes a mechanism for updating the minimum salary and compensation levels for these exemptions going forward. The threshold would automatically reset three years after publication of the final rule, and on January 1 of every third year thereafter, to an amount equal to the 30th percentile of earnings for full-time, non-hourly employees in the Northeast Census region, as published by the DOL. This threshold equaled $47,892 annually ($921 per week) in 2016.
  • Permits up to 10% of the minimum salary levels to be satisfied by nondiscretionary bonuses, incentives, and commissions paid quarterly or more frequently.[1]
  • Purports to align the PMWA duties tests with the FLSA duties tests. While the new regulations incorporate certain definitions from the FLSA administrative exemption and executive exemption regulations verbatim, the proposed PMWA duties tests still differ from the FLSA duties tests. For example, key definitions contained in the FLSA white collar regulations have not been incorporated in the proposed PMWA white collar regulations. Moreover, the proposed PMWA duties test would require executive exempt employees to “customarily and regularly” exercise “discretionary power,” while the FLSA duties test for the executive exemption contains no such requirement. Given the differences between the two sets of regulations, it is difficult to predict the extent to which courts would interpret the PMWA white collar exemptions consistent with the FLSA white collar exemptions.

Comment Deadline and Timing Implications

As noted above, the proposed rulemaking has not yet been published in the Pennsylvania Bulletin, which triggers the start of the comment period. It is expected to be published on June 23, 2018, which would mean that written comments from the public would be due on July 23, 2018. Publication of the final regulations is expected to occur sometime in 2019.

Conclusion

The proposed revisions to the PMWA’s white collar exemptions are designed to extend overtime protections to hundreds of thousands of employees in Pennsylvania. The significant increase in the compensation required to meet the proposed salary level test will likely impact longstanding staffing and compensation models.

We recommend that companies consider auditing their current employee population now and determine what changes will be made to staffing models and the classification of “close to the line” positions if and when the proposed rule becomes final. Those changes may include raising the salary for certain employees to meet the new proposed standards, bolstering job duties, or reclassifying employees from exempt to non-exempt. Reclassifying exempt employees to non-exempt, in turn, requires consideration of a broad range of issues, including communication strategy, manager and employee training, timekeeping policies and practices, scheduling, compensation structures, calculation of the overtime rate, and many other issues. Planning ahead is critical to managing the risks associated with reclassification.